Sat, 05 Apr 2003

BI expects no changes in SBI rate in near future

The Jakarta Post, Jakarta

Bank Indonesia indicated on Friday it would keep its benchmark interest rate at its current level, at least in the short run, as it anticipates potential pressure on the rupiah.

Central Bank Governor Sjahril Sabirin said this was the reason there had been no cuts in the interest rate on Bank Indonesia's one-month SBI promissory notes over the past two weeks.

"For now, there will be no change in direction. Meaning that the changes, if any, will only be small ones," Sjahril said. But he was quick to add that he had not ruled out further cuts in the long run.

After drastically lowering the SBI interest rate since the beginning of last year, the central bank two weeks ago raised the rates for the first time in many months. Currently, the central bank benchmark interest rate stands at 11.40 percent, unchanged from last week's auction.

Early of last year, the rates hovered at about 17 percent.

Bank Indonesia's move to put a halt to the declining rates came just days after the Iraq war broke out, which is expected to put pressure on the local currency.

A higher interest rate is seen as necessary to help counter strong inflationary pressure resulting from an expected weaker rupiah against the US dollar.

However, a higher interest rate would have a negative impact on economic growth.

A low interest rate is considered good because it means less expenditure on the part of the government in servicing the interest on its huge domestic debts, whose interest is mostly tied to the movement of the SBI interest rate.

Also, a lower rate would force banks to lower their interest rates on loans, to make them more affordable for the real sector.

That would help accelerate productive activities, which will in turn create higher economic growth.

In the 2003 state budget, inflation is projected at 9 percent and the SBI interest rate at 13 percent.